The Important Role of Immigrants in Our Economy

Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

Thank you for that kind introduction. I am glad to be back in Atlanta, and I am delighted to be at the Georgia Hispanic Chamber of Commerce’s (“GHCC”) 2013 Annual Awards Gala. Before I begin my remarks, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (“SEC” or “Commission”), my fellow Commissioners, or members of the staff.

I note that this year marks the 29th anniversary of the GHCC’s founding. Congratulations on this milestone. As some of you know, I have had a long history with the GHCC. I proudly served on its Board of Directors and as Parliamentarian, and had the honor to be named the GHCC Businessman of the Year in 1994 and the GHCC Member of the Year in 2005. Like many of you in this room, I share GHCC’s commitment to the goal of promoting and supporting the economic development of Hispanic businesses and individuals. And I commend your efforts to make sure that the Hispanic community is given every opportunity to contribute to our nation’s progress and economic prosperity.

Tonight I would like to spend my time with you discussing:

The crucial role that immigrants have played in the economic growth of the United States; and

How the SEC can enhance opportunities for small businesses to access capital and grow their businesses.

The Positive Impact of Immigrants on the U.S. Economy

President Obama recently stated that “[t]he lesson of [the past] 236 years [in our country’s history] is clear — immigration makes America stronger. Immigration makes us more prosperous. And immigration positions America to lead in the 21st century.”1 I completely agree with the President. Let me highlight a few interesting facts about the impact of immigrants on our national economy.

First, immigrants are business owners. According to the National Venture Capital Association, over the last 20 years, immigrants have founded, or helped to found, 25% (88 out of 356) public U.S. companies that were backed by venture capital investors.2 This list includes Google, eBay, Yahoo!, and Sun Microsystems.3 In addition, while first generation immigrants are only 12% of the U.S. population, they represent 16.7% of all new business owners in the United States.4 First generation immigrants own businesses in a variety of industries and make substantial contributions to both low-skilled and high-skilled sectors. For example, first generation immigrants:

Own 28.4% of businesses owned by those with less than a high school education;5

Own 10.8% of all firms with employees, providing job opportunities for thousands of Americans.7

Second, immigrants create jobs. The Fiscal Policy Institute found that small businesses owned by immigrants directly employed an estimated 4.7 million people in the United States. According to the latest estimates, these small businesses generated more than $776 billion in revenue annually.8

Third, immigrants increase our nation’s capacity to develop new ideas. The Partnership for a New American Economy found that foreign-born inventors were credited with contributing to more than 75% of patents issued to the top ten patent producing universities.9

Fourth, immigrants contribute to American competitiveness. This is especially true in the technology-intensive and service industries. Compared to U.S.-born Americans, immigrants are more likely to hold an advanced degree and are almost twice as likely to hold a Ph.D.10 Many of our most productive scientists and engineers are foreign-born, keeping the United States at the forefront of global innovation. A recent study found that 40% of Fortune 500 firms were founded by immigrants or their children.11 The study also found that seven of the ten most valuable brands in the world were founded by such individuals.12

Thus, it is clear that immigrants have furthered employment, productivity, and income in our economy.13 In fact, study after study has shown that immigration and economic growth go hand in hand. The data overwhelmingly provides that immigrant-owned businesses contribute greatly to the U.S. economy.14

Of course, today, Hispanics make up the largest segment of the immigrant community. As a group, Hispanics have made significant contributions to our economy, by starting new businesses, creating jobs, and utilizing their purchasing power as consumers. For example:

Nationally, there are over three million Hispanic-owned companies with over $500 billion in revenue;15

Hispanic immigrants make up 28% of small business owners nationally;16

New Latino entrepreneurs nearly doubled, from 10.5% to 19.5%, between 1996 and 2012;17

The Immigration Policy Center estimates that the purchasing power of Hispanics alone will reach $1.5 trillion a year by 2015;18

The numbers of Hispanic firms are growing more than four times faster than the overall number of U.S. firms;19 and

If it were a nation in itself, the U.S. Hispanic market would be one of the top ten economies in the world.20

Clearly, the contribution to our national economy by the immigrant community in general, and the Hispanic community in particular, is without question. Immigrants have high business formation rates, and many of the businesses they create are very successful, hire employees, and export goods and services to other countries. Immigrants are the engine of true capital formation in the United States.

Access to Capital

The positive role that immigrants play in our economy underscores the importance of making sure that immigrants and all small business owners have access to the capital that they need to start and grow their businesses, create jobs, and increase production. Although personal savings is the largest source of capital for most start-ups, external capital is also important to many small and medium-sized businesses.21 The need for outside investment is even greater among minority entrepreneurs, who tend to have lower personal wealth than their non-minority counterparts.22 Many entrepreneurs max out their credit cards, or take loans or investments from friends and family; others rely on trade credit and other forms of vendor financing, or seek commercial bank loans and lines of credit.23

Other businesses, including the fastest growing small businesses, often seek outside equity investments for early-stage capital.24 These fast growing firms, sometimes called “gazelles,” are extremely important to job growth. One study reported that 43,000 fast-growing businesses between three and five years old — about eight-tenths of 1% of all U.S. businesses — were responsible for about 10% of overall net job creation in the economy.25

Many small businesses, however, can have a difficult time finding external financing. The recent financial crisis and its aftermath still affect the availability of credit, and many small business owners report having difficulty getting credit from banks.26 A 2012 study by the National Small Business Association found that 43% of small business owners surveyed could not get the financing they needed.27 Moreover, and unfortunately this is no surprise, people of color and women face additional burdens to raising capital for their small businesses.28

Given this background, it is important that we consider ways for small businesses to access the capital markets. This is where the SEC can have a positive impact. As many of you know, the SEC is the Federal agency responsible for regulating our nation’s capital markets. This includes oversight of approximately 25,000 entities, including 10,600 investment advisers managing nearly $54 trillion in assets, 9,700 mutual funds and exchange traded funds (ETFs) with over $13 trillion in assets, and over 4,600 broker-dealers, and approximately 460 transfer agents. The SEC also oversees 17 national securities exchanges and seven active registered clearing agencies. The average transaction volume cleared and settled by the seven active registered clearing agencies is approximately $6.6 trillion a day. It goes without saying that our capital market is the largest and most complex in the world.

The SEC is also responsible for establishing the disclosures required to be made by public companies and for ensuring that investors receive the information they need to make informed decisions about their investments. Of course, the SEC is well-known as a law enforcement agency. SEC enforcement actions against those who engage in fraud and misconduct are essential to strong capital markets. The SEC has no stronger mission than the protection of investors.

Part of the SEC’s mission also includes facilitating capital formation.29 As an SEC Commissioner, my focus is on building a regulatory environment that allows companies to raise money in a way that protects investors and enhances our country’s capacity to continue to produce goods and provide services, and the ability of our citizens to earn a living wage.

Tonight, I want to focus on two provisions of the recent JOBS Act that are intended to enhance the ways that small businesses are able to raise equity capital.30

Crowdfunding

One provision that is receiving a great deal of attention is crowdfunding.31 As you may know, crowdfunding is the use of the Internet to raise money in small individual amounts from a large number of investors.32 Globally, crowdfunding platforms raised almost $2.7 billion in 2012, an increase of more than 80% from the prior year.33 Today, crowdfunding platforms in the U.S. generally operate on a “pre-sale” or “donation-and-reward” model, in which participants contribute to a project they wish to support in exchange for a copy of the finished work or some other token of thanks.34 Currently, crowdfunding may not be used to sell company shares in the United States. Under current laws, that would be a public offering and would require registration with the SEC, a process that, admittedly, can take time and money, but is designed to inform and protect investors.35 The proposed exemption for crowdfunding would allow companies to comply with specific requirements applicable to crowdfunding, in lieu of the full public offering registration process.

Although the SEC’s crowdfunding rules are a work in progress, some specific criteria are set forth in the JOBS Act itself.36 Two important points to note are:

First, businesses using the crowdfunding exemption will be permitted to raise up to $1,000,000 in a 12-month period.37 I expect that this limit will keep crowdfunding focused primarily on providing capital to small business. Among other requirements, crowdfunding offerings will need to provide investors and the SEC with specified disclosures; however, these disclosures are expected to be substantially less fulsome than those currently required from issuers in registered public offerings; and

Second, the crowdfunding exemption will allow any individual investors to participate, regardless of their wealth or sophistication — although aggregate crowdfunding purchases by an individual investor will be subject to annual limits, based on annual income and net worth.

Crowdfunding may turn out to be a very useful mechanism by which small businesses can raise needed capital, by harnessing the power of the Internet and social media to connect entrepreneurs with individuals. Nonetheless, many observers are concerned that unscrupulous persons will try to take advantage of this innovation for nefarious purposes.38 For example, one state securities regulator is concerned that the so-called “wisdom of the crowd” won’t be enough to protect unsophisticated purchasers, because crowdfunding provides investors with “almost no bargaining power and little information.”39 In addition, the president of the national association of state securities regulators has expressed concern that investors will be stuck with any shares they buy through crowdfunding, as trading markets for the shares may never develop.40

Clearly, all investments bear some degree of risk, and it may never be possible to do away entirely with fraud. However, to the extent that Internet crowdfunding increases the risk of fraud, it will be incumbent upon the SEC and state securities regulators to counter such increased risk through robust investor education and outreach efforts, and through strong enforcement efforts, when fraud occurs.

Regulation A-Plus

A second provision of the JOBS Act geared towards small business is the so-called “Regulation A-plus” offering that will permit companies to raise up to $50,000,000 in any 12-month period by publicly offering freely-tradable equity, debt, or convertible securities.41

Companies issuing securities in reliance on Regulation A-plus will be required to provide an offering circular to purchasers with relevant information about the company.42 The Regulation A-plus process and related disclosures are required to include audited financial statements, but will not be as broad as the requirements applicable to offerings that are fully-registered with the SEC. I expect that state securities regulators will work with the Commission to develop a uniform offering circular intended to meet both federal and state law requirements under the proposed exemption.

The principle underlying Regulation A-plus is that it will be used by companies that are likely to be smaller than companies that opt to register with the Commission, which typically raise amounts that exceed $50,000,000. However, I intend to take a watchful approach to this rulemaking to make sure that investor protection is maximized to the extent possible.43

The Need for Regulatory Caution

Crowdfunding and Regulation A-plus have the potential to change the landscape for financing small businesses. These developments may ultimately bring benefits to entrepreneurs, and particularly to women and minorities who have traditionally had difficulty in finding financing. In fact, Title VII of the JOBS Act specifically requires the SEC to conduct outreach to inform minority and women-owned businesses of the changes made by the Act.44

If these new capital-raising methods are implemented with thoughtful rules that protect investors and maintain a fair and level playing field, investors will have the confidence they need to participate in those offerings, and companies will benefit from having less expensive methods to raise capital. However, these new exemptions also call for a degree of regulatory caution — if they become instruments of fraud and manipulation, the resulting harm to investors may impair future capital formation, cost jobs, and hurt entrepreneurs and small business owners. That harm can be particularly devastating to women and minorities.

Conclusion

The potential for immigrants to grow our economy is enormous. This is particularly true of the Hispanic community, the fastest growing segment of the immigrant population. In 1968, Latinos represented only about 4½% of the total U.S. population.45 Today, the Census Bureau estimates that Hispanic-Americans make up 16.7% of the U.S. population.46 Clearly, Hispanic-Americans will continue to play an important role, as our nation faces the challenges of the 21st Century.47

Today’s young Hispanic-Americans will be our teachers, our doctors, lawyers and engineers, our business leaders and entrepreneurs, and our elected officials and community leaders of tomorrow. There is no doubt that young Hispanic-Americans will continue to contribute in greater numbers to the success of this nation. In 2011, for the first time, the number of 18- to 24-year-old Hispanics enrolled in college exceeded two million, reaching a 16.5% share of all college enrollments.48 This milestone represented not just population growth, but also increasing high school graduation rates, which rose from just 64% in 2000 to 78% in 2010.49 And just last week, a report by the Pew Research Center found that a record 69% of all Hispanic-American high school graduates in the class of 2012 enrolled in a two-year or four-year college that fall. That is a college enrollment rate higher than that of white high school graduates.50

The important contribution of Hispanic-Americans and other immigrants to our future is clear. That’s why I’m hopeful that we will finally see real immigration reform that will bring people out of the shadows and allow them to flourish and contribute to our society. Freeing that powerful human capital can take our country to new levels of prosperity. That’s particularly true of young Latinos and Latinas that came to this country as children and know no other country as their own. We need immigration reform that will allow them to fulfill their dreams and, in so doing, take our country to greater heights.

I have a profound faith in the United States. Like many immigrants, I came to this country with very little and I am grateful to this country for the opportunities it has provided. I arrived as a refugee from Cuba as a six-year-old child with little more than the clothes I was wearing, and did not speak a word of English. Fortunately, I was reunited with my parents a few years later, and I was able to pay my way through college and law school by taking on jobs ranging from being a “stock boy” in a yarn store to loading baggage and cargo into airplanes at the Miami International Airport.

It is a long way from the hot tarmac of the airport in Miami to the halls of our nation’s capital, but I carry that experience with me. In my view, there is no greater country than the United States. I also believe that our country’s diversity, and our nation’s tradition of welcoming new generations of immigrants with “open arms,” is a significant reason for that greatness. Thus, our government needs to have common sense policies that will utilize all of our talents — regardless of race, ethnicity, or gender — and help enhance our country’s economic development.

People from around the world are drawn to America for its promise of freedom and opportunity. Truly, we are an immigrant nation. Those that are fearful about the influx of newcomers only need to remember the contributions that immigrants have made to American prosperity.

I’ll end my remarks where I began. I’m delighted to be here. Organizations like the GHCC help support and strengthen our businesses, our communities, and our country. Thank you for all that you do.

14 Fiscal Policy Institute, “Immigrants and the Economy: Contributions of Immigrant Workers to the Country’s 25 Largest Metropolitan Areas” (December 2009) (“[i]n the 25 largest metropolitan areas combined, immigrants make up 20 percent of the population and are responsible for 20 percent of economic output. Together, these metro areas comprise 42 percent of the total population of the country, 66 percent of all immigrants, and half of the country’s total Gross Domestic Product.”), http://www.fiscalpolicy.org/ImmigrantsIn25MetroAreas_20091130.pdf.

32 In 2011, Kickstarter, the most successful of the current crop of non-financial crowdfunding platforms, raised $83 million for nearly 12,000 projects, which were financed through contributions from 960,000 unique donors. The average pledge amount was about $86, and the median pledge amount was $25. See, “Crowdfunding: Micro no more” (January 22, 2012), http://www.economist.com/blogs/babbage/2012/01/crowdfunding (last visited, May 6, 2013).

34 For example, an author might raise money to fund publication of a book. Backers might receive a copy of the book when it is published, with larger contributors receiving an autographed copy or special edition. Entrepreneurs can use this type of crowdfunding today, without registration under state or Federal securities law, because contributors do not expect to profit financially from the enterprise they support. See, http://www.kickstarter.com/hello?ref=nav.

35 To the extent properly structured, the business of “peer-to-peer” lending (a form of crowdfunding for debt capital) may be conducted in the U.S. without registration under the Securities Act of 1933 or the Securities Exchange Act of 1934.

36 Pursuant to the JOBS Act, the rules will require that all crowdfunding transactions be conducted through an intermediary, which will be either a registered broker or a new type of entity called a “funding portal.” Funding portals that meet certain conditions will not have to register as broker-dealers, but will need to become members of a self-regulatory organization. Among other restrictions, funding portals that are not registered broker-dealers may not: (i) offer investment advice; (ii) solicit purchases, sales, or offers to buy the securities offered through its platform; or (iii) hold or handle customer funds or securities.

37 The cap on money raised is to be adjusted for inflation at least every five years. Issuers offering $100,000 or less will provide investors with financial statements certified by management and a copy of the prior year’s income tax return, if any. Issuers offering between $100,000 and $500,000 will provide financial statements reviewed (but not necessarily audited) by a public accounting firm. Issuers offering more than $500,000 will have to provide audited financial statements.

38 The use of crowdfunding to reach potentially vulnerable segments of society is a particular concern. Many of the enforcement cases I see as a Commissioner arise from so-called “affinity frauds” that exploit the trust and friendship that often exists among members of any ethnic, religious, or other community. (See, “Investor Bulletin: Affinity Fraud,” SEC Office of Investor Education and Advocacy, www.sec.gov/investor/alerts/affinityfraud.pdf, which among other things lists a selection of recent affinity fraud schemes charged by the SEC.) Such scams can be devastating when the fraudster takes advantage of language barriers or underserved groups, who may have limited resources and a reduced ability to identify financial fraud until the money is gone. Given the possibility that crowdfunding may facilitate affinity fraud by making it easier to identify and target vulnerable groups, I urge the Commission’s enforcement staff and state securities regulators to take a proactive approach to monitor the crowdfunding space for potential problems. In that regard, I note that NASAA, the North American Securities Administrators Association, announced the formation of a task force on Internet fraud investigations shortly after the enactment of the JOBS Act. Press release, “NASAA Sees Sharp Spike in Crowdfunding Presence on the Internet” (December 5, 2012), http://www.nasaa.org/18951/nasaa-sees-sharp-spike-in-crowdfunding-presence-on-the-internet/.

40 Dina ElBoghdady, “’Crowdfunding’ trend poised to make mark on U.S. investing landscape,” The Washington Post (April 29, 2013), available athttp://articles.washingtonpost.com/2013-04-29/business/38902177_1_crowdfunding-small-businesses-investors (citing NASAA president Heath Abshure). Note: Pursuant to the JOBS Act, securities issued in crowdfunding transactions will not be freely tradeable for at least one year after the date of purchase. Investors that purchase such securities should understand that they may be required to hold such investment indefinitely.

41 Title IV of the JOBS Act, §§401-402. Notwithstanding references to “Regulation A-plus,” the Commission’s regulations implementing Title IV will differ from the SEC’s existing Regulation A in several important ways — not just the higher offering amount. For example, SEC reporting companies are not eligible to use Regulation A, but will be eligible to use the new regulations under JOBS Act Title IV, and issuers taking advantage of the new regulations will be required to file audited financial statements with the Commission annually, as well as such other periodic disclosures as the Commission may by rule require. However, for ease of reference I follow the popular convention and refer to the Title IV rules as Regulation A-plus. Please note as well that Title IV requires the Commission to consider increasing the $50 million offering limitation for this exemption every two years, and — if the Commission determines not to increase such amount — to report its reasons for not doing so to Congress.

42Id. Title IV of the JOBS Act contemplates that the Commission’s regulations implementing the new exemption will provide for necessary conditions and requirements for the protection of investors, including among other things a disqualification provision for so-called “bad actors” and a requirement that the issuer prepare and electronically file with the Commission and distribute to prospective investors an offering circular including audited financial statements, a description of the company’s business operations, its financial condition, its corporate governance principles, the use of investor funds, and other appropriate matters.

43 As the case with the existing Regulation A, companies that complete offerings pursuant to Regulation A-plus would not automatically become subject to Exchange Act reporting requirements. However, since Regulation A-plus requires the annual filing of audited financial statements, and offerings under Regulation A-plus are not exempt from state blue sky regulation unless the securities offered are offered or sold on a national securities exchange (or offered or sold to a qualified purchaser), Regulation A-plus is expected to appeal to issuers that intend to become reporting companies.

47 National Public Radio program broadcast, “College-Bound Latino Students at New High,” (August 22, 2012), transcript available athttp://www.npr.org/2012/08/22/159777934/college-bound-latino-students-at-new-high. (James Montoya, College Board: “… we cannot underestimate the essential role that Latinos in the U.S. will play in reaching our national goal of 55 to 60 percent of young Americans 25 to 34 having a college degree. … to keep the U.S. as a leader in an increasingly global economy …”

49 Richard J. Murnane, “U.S. High School Graduation Rates: Patterns and Explanations,” National Bureau of Economic Research, NBER Working Paper No. 18701 (January 2013), http://www.nber.org/papers/w18701. (In this instance, “graduate” refers to those who obtain a regular high school diploma and does not include students obtaining a GED.)